American Airlines chief piloting company through stormy period

June 04, 2006|By Mark Skertic, Tribune staff reporter

Of the large U.S. airlines with an international reach, only American Airlines has been able to stay out of bankruptcy court.

American flirted with filing in 2003, but the Ft. Worth-based carrier has managed to cut billions of dollars in costs without the help of the court. It also has retained its distinction as the world's largest commercial carrier despite brutal competition and record fuel prices.

Like its competitors, it has lost billions of dollars in recent years. American's parent, AMR Corp., lost $92 million in the first quarter, a small victory for a company that lost $231 million before a one-time gain during the same period in 2005.

Still, some Wall Street analysts predict 2006 could be a profitable year for the carrier.

American's future is important to Chicago, where it rivals United Airlines for traffic at O'Hare International Airport.

During a recent stop in Chicago for his annual meetings with employees, American Airlines Chief Executive Gerard Arpey spoke with the Tribune about how his company is responding to changes in the business.

Q. Has the airline industry turned the corner economically?

A. The airline industry is still a very troubled industry. You need only look at the first-quarter results to see that. We're in an environment today where we're all running record load factors and we're all losing money. What kind of sense does that make?

There are a variety of factors at play here. One, certainly, is oil. The other important factor is Southwest Airlines is in a very unique, hedged position versus the rest of the industry. While most of us are paying $60 to $70 a barrel for oil, Southwest is paying $38.

Good for them. They made a big bet, it turned out to be right, and they are enjoying the benefits of that.

Q. What will it take to fix the industry's problems?

A. The airline industry is like any other industry over the long run. That means the capital markets will fix it.

You're seeing that today, because you are not seeing additional aircraft being added to the U.S. airline industry at the pace of investment that it has historically.

For good reason. The industry has been destroying capital for five-plus years now. And eventually the capital markets turn off the capital.

Q. But if you wanted to borrow money, aren't there lenders out there who would give it to you?

A. Yes and no. If you're on a trajectory that indicates you are moving in the right direction, and if you're on a path to profitability, then yes. There's still a lot of asset-backed financing in this industry.

But I think it's much more risk averse than it was five years ago. And rightfully so.

Q. Do the airlines that have gone into bankruptcy or recently emerged have a competitive advantage?

A. They no doubt have a labor-cost-per-ASM (available seat mile, a standard industry measurement) advantage that has been achieved through the bankruptcy process. But the equation is more complicated in this business than your labor cost per ASM.

We have, if not the lowest, darn near the lowest labor cost per ASM in the industry. Southwest would be the one that's very close to us. While many of our competitors have been in bankruptcy court for a number of years, we've not been sitting on our hands. We have been working very hard to re-engineer our business.

What I have continued to preach within our company is that labor is not the problem. Labor is a seminal part of the solution.

Q. Although you have cut employee wages and benefits, the reductions have not been as severe as those undertaken by competitors that have been through bankruptcy. And you have been able to preserve pensions. Do you anticipate long-term benefits from that?

A. It remains a work in progress. What we're trying to do fundamentally is make our labor unions, and by extension our front-line employees, our business partners.

If we don't figure out this organized labor/management dynamic--to make it more constructive, to create a true business partnership--it doesn't matter how smart we are. We are not going to be successful.

Q. Is there still a place for so-called legacy carriers like American?

A. There was a lot of talk in '03, '04 about how the traditional network-airline model was going to get thrown on the ash heap. We needed to all become point-to-point, JetBlue-kind of business models.

We had the view then, and we have it now, that that is misguided thinking. The traditional network model is a solid business model if you can drive enough complexity out so that you can drive your costs down enough. Not to the low-cost-carrier level, but can you drive your costs down enough that revenue premiums that the network model creates are enough to create a sufficient profit equation?